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Advanced Financial Accounting

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Advance Financial Accounting (FIN-611)
VU
LESSON # 21
COMPANY ACCOUNTS
Components of financial statements
As per International Accounting Standards there are five components of financial
statements:
1.
Balance Sheet
2.
Income Statement
3.
Statement of Changes in Equity
4.
Cash Flow Statement
5.
Notes
Here we will discuss all but cash flow statement in detail as the cash flow statement
will be discussed in separate chapter.
1) Balance Sheet
It has already been discussed in the preceding section that balance sheet of an entity
shows financial position, which comprises of resources and source. A very simple
equation of balance sheet is:
Assets = Owners' Equity + Liabilities.
Where Assets are the resources and Owners' Equity and Liabilities are the sources.
Limited Liability Company
Balance Sheet
As on December 31, 2009
Rs.
Rs.
Assets (Resources)
Non Current Assets
Fixed Assets
Tangible Assets
***
***
Intangible Assets
***
Long Term Investments
***
Long Term Loans
***
Long Term Advances, Deposits & Prepayments
***
***
Current Assets
***
Current Liabilities
(***)
***
Capital Employed
***
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Advance Financial Accounting (FIN-611)
VU
Financed By (Sources)
Owners' Equity
Ordinary Share Capital
***
Reserves
Capital Reserves
***
Revenue Reserves
***
***
***
Non Current Liabilities
Loan Stocks/Term Finance Certificates
***
Loan from financial institutions
***
Finance lease liability
***
***
Capital Employed
***
Approved by Chief Executive and a Director
Classification of assets in the balance sheet is on the base of permanency order. This is
known as marshaling. In a company balance sheet grouping and marshaling is strictly
followed. It is clearly presented in the balances sheet that assets are broadly classified
into Non-Current Assets and Current Assets. Non-Current Assets are then grouped
into fixed and other non-current assets. Fixed assets are further classified into fixed
tangible and fixed intangible assets.
a) Fixed Tangible Assets
These are the property, plant and equipment that are held by the entity a) for
production or selling of goods or services, b) for administrative purposes, or c) for
rental to others. These are expected to be useful for the entity for more than one
accounting year.
Examples include: land & Building, Plant & Machinery, Furniture & fixtures, Motor
Vehicles, Office equipments etc.
b) Fixed Intangible Assets
These are the identifiable, non monetary asset in control of the entity that have no
physical existence and are expected to be useful for the entity for more than one
accounting year.
Examples include: Trademark, Copy right, Patents, Designs etc.
c) Long term Investment
These are the investments made by the company in other entities for more than one
accounting year.
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Advance Financial Accounting (FIN-611)
VU
Examples include: Investments in equity instruments or debt instruments of other
entities.
d) Long term loans
These are the loans given to the third parties on long term basis, receivable after the
expiry of more than one accounting year.
e) Long term advances, deposits, and prepayments
These are the security deposits, fixed deposits, advances given to the suppliers of
assets, and prepayments on long term basis.
f) Current Assets
These are the assets recoverable and tradable within the normal operating cycle of an
entity that is 12 months after the balance sheet date in normal circumstances. Cash and
cash equivalents are also current assets.
g) Current Liabilities
These are the obligations that are payable within the normal operating cycle of an
entity that is 12 months after the balance sheet date in normal circumstances. This also
include bank overdraft.
2) Income Statement
Income Statement is prepared to know the financial performance of an entity. In an
Income Statement; expenses for the year are subtracted from the incomes earned
during the year. Both incomes and expenses are measured according to the accrual
concept, whereas, profit are measured according to the matching concept.
According to the IAS 1 Income Statement can be prepared using ether:
1. Function of expenses method, or
2. Nature of expenses method
a) Function of expenses method
According to the functions of expenses method the expenses are divided into five
groups according to their functions:
 Cost of sales
 Administrative
 Selling and marketing
 Financial
 Income Tax
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Advance Financial Accounting (FIN-611)
VU
Incomes are also divided into two groups:
Sales revenue (operating income)
Other incomes (non-operating incomes)
Limited Liability Company
Income Statement
For the Year ended December 31, 2006
(Function of expenses method)
Rs.
Rs.
Sales revenue
***
Cost of goods sold
(***)
Gross profit
***
Operating expenses
Administrative expense
***
Selling & Marketing expenses
***
(***)
Profit from operations
***
Other income
***
Financial expenses
(***)
Profit before tax
***
Income tax expense
(***)
Profit after tax
***
b) Nature of expense method
According to the nature of expense method all expenses are aggregated in the incomes
statement and are matched with the total incomes for the year. Since both incomes and
expenses are of different nature therefore this method of preparing Income Statement
is known as nature of expense method.
Limited Liability Company
Income Statement
For the Year ended December 31, 2006
(Nature of expense method)
Rs.
Rs.
Incomes
Sales revenue
***
Other incomes
***
***
Expenses
Increase/decrease in inventory
***
Raw materials and consumables
***
Employees' salaries and wages
***
Utility bills
***
Other business operation expenses
***
(***)
Financial expenses
(***)
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Advance Financial Accounting (FIN-611)
VU
Profit before tax
***
Income tax expense
(***)
Profit after tax
***
3) Statement of Changes in Equity
Statement of changes in equity is prepared to know the movement in the items of
owners' equity. There might be two types of the statement:
1. Statement that shows the movement in the retained profits only
2. Statement that shows the movement in all the items of owners' equity
Limited Liability Company
Statement of changes in equity
For the year ended December 31, 2006
(Showing movement in the retained profits only)
Rs.
Rs.
Retained profits b/f
***
Profit after tax
***
Dividend paid
***
Transfer to reserves
***
(***)
Retained profits c/f
***
(Showing movement in all items of owners' equity)
Share
Share Revaluation Named Retained  Total
Capital Premium Reserve  Reserve  Profits
.
Opening Balance ***
***
***
***
***
***
Fresh issue of shares
***
***
***
Revaluation of Assets
***
***
Profit after tax
***
***
Dividend paid
(***)
(***)
Transfer to named reserves
***
(***)
_
Bonus Share
***
(***)
(***)
(***)
-_
Totals
***
***
***
***
***
*** .
101
Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet